Author: Sovereign Crypto
Translator: Bai Hua Blockchain
The grim reality shows that this cycle has once again proven that although there may be some similarities between market cycles, they are by no means exact replicas. The institutionalization driven by ETF adoption, changes in the political environment, and the plight of the mainstream economy have collectively altered the underlying structure of the Altcoin market, forcing us to rethink many of our previous assumptions.
1. Dynamics of Capital Flows
In previous cycles, capital flows had a relatively predictable pattern:
1) New capital first entered the BTC market.
2) It then flowed into ETH and blue-chip Tokens in search of higher returns.
3) Finally, it entered the small and micro-cap Token markets, attracting retail investors chasing "life-changing returns".
However, the pattern of capital flows in this cycle has undergone significant changes. The current Altcoin market can be effectively divided into two ecosystems: the institutional Token and the retail Token.
2. The Institutional Ecosystem
It is primarily accessing BTC and ETH through spot ETFs. To date, capital has mainly flowed into BTC, pushing its price nearly 40% above the previous all-time high (ATH). As the BTC market becomes saturated, institutional capital may seek higher returns, and ETH ETFs become almost the only choice. In this transition, a large amount of capital will shift towards ETH ETFs, and this capital flow may lead to a rapid price response in the relatively illiquid ETH market (similar to the initial approval of the ETH spot ETF, when the price rose 15% on the same day).
3. The ETH Rotation Effect
The rise in ETH prices may further spill over into the blue-chip Token market, as Altcoin-native companies with actual ETH holdings will begin to position themselves for the Alt-Season. Currently, the capital rotation into ETH seems to be very close, but the specific timing remains to be observed.
This leads to the second ecosystem: the retail Tokens.
4. Retail Capital Completely Bypassing BTC and ETH
This is the first time in Altcoin history that retail investors no longer venture into BTC and ETH, and then gradually migrate their gains to higher-risk assets. They realize that from the perspective of "life-changing returns", they have missed the best opportunities in BTC and ETH, and can only significantly increase their risk appetite.
In the real world, people are struggling: inflation is oppressing people, high taxes, stagnant job markets, and high living costs make it impossible for most to invest or save for retirement. They don't care about BTC and ETH, but instead directly skip these "rich people's coins" (BTC, ETH, and blue-chip Tokens), download the Phantom wallet, and dive headlong into the seemingly endless world of "Memecoins", trying to find the "lottery" that can change their fate. But most will only encounter failure and eventually withdraw from the Altcoin space entirely.
1) The capital flow in the retail ecosystem has been completely overturned:
Capital flows directly to Memecoins, completely bypassing considerations of technology or utility. Gains are mainly concentrated in the hands of a few experienced "veterans" who, like souvenir vendors at tourist attractions, wait for new retail investors to arrive and empty their wallets, tempting them to believe in the dream of overnight wealth ("Look at this case where someone turned $50 into $1 million, you can do it too!").
Currently, the Altcoin market has not generated new wealth inflows, only a "player-vs-player" (PvP) redistribution of wealth, transferred from retail investors to professional scammers. Memecoins, although initially appearing as "anti-establishment" Altcoins with a fair launch, have now transformed into highly manipulated scams: fraudsters seize the majority of the allocation at the Token issuance, and then implement "rug pulls" or even worse. This game has a time limit, and the capital that can be extracted is limited. Once it is exhausted, the capital will seek a new destination.
2) Expectations and Impacts
I expect the current "Memecoin casino" to self-cannibalize. The top Memecoins may survive and perform well, while the rest will gradually be forgotten, along with the wealth of retail investors. Even in the best-case scenario, this is just a massive "musical chairs" game, in which more than 95% of participants will end up with losses.
The impact on the capital flow of major Tokens (such as SOL, AVAX, etc.) is that they will require massive venture capital, institutional capital, and retail capital inflows to trigger a new Altcoin season. This may happen after the capital outflow from BTC and ETH, when institutions and retail whales begin to seek higher-risk assets to carry their new-found gains. Recently, whale wallets have started net-selling BTC.
5. The "Stubborn Virus" of GameFi
In the early stages of this cycle, the GameFi craze saw many game projects frequently launching "vapourware" - poor-quality games, high FDVs (fully diluted valuations), useless Token economics, and various other issues. This chaos has led to a tarnished reputation in the GameFi field.
Now, the high-quality projects that have spent years building and preparing to launch are facing tremendous challenges, needing to overcome this negative stereotype to gain market attention. Nevertheless, there are indeed some promising projects in the GameFi space, and once a highly successful game emerges, the resulting effect could trigger a massive speculative frenzy across the entire GameFi ecosystem.
6. The State of Launchpads
Launchpads have almost disappeared, but the survivors may see a strong resurgence.
Venture capital funds (VCs) had tried to extract maximum value from retail investors, leading to the destruction of this model: long lock-up periods, high FDVs, exploitative centralized exchange (CEX) listing strategies, and predatory market-making behavior have put Launchpads in a difficult position.
A new model is emerging, showing significant advantages: low FDV, high unlock ratios, and projects without CEX listings are far superior to the old VC-backed model. Investing in top-tier Launchpads will be key, as these opportunities will become scarcer and the entry barrier higher.
It is certain that just a few 50x or 100x projects launching will make retail investors scramble to buy Launchpad Tokens and compete for access.
7. 95% of Tokens are Unnecessary and Useless
To be frank, the primary function of Altcoin Tokens is speculation. Only 5% of Tokens truly have utility, representing partial ownership of revolutionary technologies and platforms. The rest are pure speculative games, destined to go to zero. But at the same time, choosing the right projects can yield massive returns.
8. Dilution Makes the Market Crowded and Difficult to Navigate
In 2020, the number of Tokens in the Altcoin market was around 10,000 at the market peak. Today, the same number of Tokens are being created every day. The vast majority of these projects are worthless, but they create "noise" that obscures the truly valuable and innovative projects. Undoubtedly, these revolutionary projects do exist, but it is difficult for the average investor, especially those with only a superficial understanding of the Altcoin space, to find them.
This also explains why many newcomers are more inclined to invest in Memecoins. They don't need to understand complex technology, just see a cute dog wearing a hat, whose only "function" is to have no function - combined with a sense of "hitting the jackpot", this is already enough to attract them.
9. The Value Output of KOLs is Far Below the Value They Extract
The influencers in the Altcoin space have degenerated to the point where only a few can provide genuine value and information. Most have turned to sensationalist headlines, shameless promotion, and outright fraud.
The rise of Memecoins has significantly reduced the role of these influencers in providing real data, and they have instead fully immersed themselves in unscrupulous promotion and "pumping and dumping". It is essential to carefully discern useful information and not blindly follow these "false shepherds".
11. MicroStrategy may become the GBTC of this cycle
The premium on MicroStrategy's ($MSTR) net asset value (NAV) is growing rapidly, reflecting the strong demand for Bitcoin in the traditional financial market. However, as the cycle nears its end, this premium is likely to reverse and turn into a discount. Pay attention to this indicator, as it may be a signal of a cycle reversal. Although there will inevitably be calls for a "super cycle" at the peak of the bull market, this will be followed by a massive bear market decline.
For those who can identify these signals, this may be an excellent opportunity to short the market, but it will not happen in the short term.
12. The "Altcoin season" is "dead", Ethereum is "dead"... The ultimate contrarian indicator
The market is flooded with pessimistic voices about Ethereum and Altcoins "having no more momentum". However, this is a perfect contrarian indicator.
Although Ethereum has underperformed, I remain firmly in my position, while also holding long-term Altcoin positions (some of which have performed well, and some not so well). Whenever everyone focuses on the price rise of BTC and abandons their Altcoin and Ethereum positions, until the frenzied chasing of BTC at the local top, that's when the real momentum for Altcoins and Ethereum will arrive.
13. ETF options will bring massive volatility - both up and down
On the first day of IBIT's listing alone, there was nearly $2 billion in notional option value traded, mostly concentrated in call options (betting on a rise in BTC price). The sellers of these call options typically hedge by purchasing the underlying ETF, thereby driving up the price. This trend is likely to continue in the coming months.
14. Regulatory clarity is a huge positive, eliminating barriers to entry in the crypto space
In past cycles, capital entry into the crypto space faced various obstacles, such as difficulties in depositing and withdrawing funds, uncertain regulations, pending legal cases, and the excessive caution of trading platforms and crypto companies. Now, this situation has undergone a complete transformation. The launch of spot ETFs and regulatory clarity not only open the floodgates for capital entering the crypto space, but also provide opportunities for funds to invest in crypto startups.
Everything is in place... No one could have foreseen so many positive factors converging at such a perfect timing. This bull market has the most explosive potential in history, including Altcoins and Ethereum. Be patient and wait!
The realized positives include:
Approval of Bitcoin and Ethereum spot ETFs
A significant shift in Trump's attitude towards cryptocurrencies, driving positive regulation
Trump's comprehensive victory
Resignation of SEC Chairman Gary Gensler
Sovereign entities purchasing Bitcoin
China "unblocking" cryptocurrencies again
Favorable legal precedents set in the Coinbase and XRP cases
Stablecoin minting reaching an all-time high
Bitcoin and Ethereum exchange balances reaching all-time lows
MicroStrategy's plan to purchase $42 billion in Bitcoin over the next three years
Bitcoin ETF becoming the largest ETF product in history, several orders of magnitude larger than the gold ETF
15. Infrastructure improvements amplify the bull market potential
Trading platforms, wallets, DeFi protocols, and traditional finance access methods have all seen significant improvements. User interfaces and user experiences have become simpler and more user-friendly, and continue to be optimized in a more friendly regulatory environment. These improvements have greatly reduced friction and will attract more retail capital once the bull market starts, the scale of capital inflow will be immeasurable.
16. Summary
The development of this crypto bull market is filled with unpredictable factors. However, there is one thing that is always easy to predict in each cycle, and that is the inevitable emotional response of retail investors: the latest overvalued projects are great, buy! The old undervalued projects are boring, sell! Altcoins are cold, buy Bitcoin! Ethereum is not working, sell it!
This emotional reaction is always comparable to the "Cramer effect", perfectly serving as a contrarian indicator. Ultimately, 95% of retail investors will lose money. Be sure to be one of the 5%, and contrarian thinking is the key. Good luck to everyone!
